MGM sells ‘Hannibal’ vid at flat rate

In a move that could herald a sea change in how studios market new releases to the video rental market on VHS, MGM is dropping the price retailers have to pay for “Hannibal” from the traditional $75 per cassette to $45. At the same time, the studio is dropping the complicated and controversial buying programs for retailers on the title, in favor of a single, flat price.

If the move works with “Hannibal,” which grossed $165 million domestically, other studios are likely to quickly follow suit. But if the move flops, MGM could end up blowing an opportunity for big vid coin from one of the studio’s biggest hits in years.

While studios have traditionally slapped a $70 to $75 wholesale price on VHS cassettes (except on those handful of titles designated as “sell-through”), the buying programs have made it so that almost no retailer pays the official wholesale price anymore.

The studios developed the strategy three years ago for retailers who don’t use rev-sharing, in an effort to get more cassettes into the marketplace. The program is a system of goals and rewards that reduces the average price per cassette as retailers buy more of them.

Typically, a studio sets a minimum number of cassettes, or “goal,” a retailer has to order at the full wholesale price to qualify for the program. If the retailer meets the goal, he can then order a fixed number of additional copies at some fraction of the wholesale price, usually producing an average price of around $40 per cassette.

The system was designed to preserve some measure of predictability for the studios. Since the studio sets the goal for each individual retailer, it can project its total coin before the cassettes ever go out the door.

But the programs have long been controversial. Not only are they an administrative headache for the studios, retailers complain the goals the studios set are too high, forcing them to take more copies of a movie than their store needs and making the programs uneconomical, despite the lower average prices.

In response, many retailers adopted the practice of “sideways selling,” in which two retailers team up to buy a single store’s goal, then split the cassettes between them. The studios have tried various tactics to stamp out the practice, but there’s little they can do to police it.

Virtually all studios have been toying internally with the idea of discontinuing the programs and adopting a single, flat price, but no one has wanted to go into the market with an important title without goals to guarantee a minimum revenue level.

Earlier experiments with flat pricing by Artisan on “The Black Mask” and USA Home Entertainment with “A Map of the World” were disappointing, because retailers took advantage of the lower wholesale prices but didn’t buy significantly more copies. Retailers said the titles weren’t big enough to merit deeper buys and therefore weren’t good tests of the flat-price approach.

But while shifting to a flat price/no goal model for VHS obviously entails some risk for the studios — especially on a title as important to a studio as “Hannibal” is to MGM — there soon may be little choice. By now, most studio marketing execs acknowledge, sideways selling is so rampant that it largely defeats the point of the programs.

Plus, with the rapid growth in popularity of DVD, retailers are increasingly opting out of the VHS programs altogether, and shifting their resources into the new format, where discs still typically carry wholesale prices of $15 to $18.

If the studios want to keep the VHS business from collapsing prematurely under the weight of its own complexities, they may need to take some risks. And “Hannibal” seems to be a good place to start.